US Investors Remain Confident in Ability of Active Managers

Investors Look to Active Managers to Protect Capital and Manage Risk in Down Markets

Short-Term Pressures Are Pervasive

Negative Interest Rates and Growing Government Debt Are Top Concerns

BOSTON (November 17, 2016) – According to results from the 2016 MFS Active Management Sentiment study, actively managed strategies continue to dominate investment portfolios, and confidence in active management remains strong. Consistent with their peers worldwide, professional investors in the United States have allocated 75% of their total assets under management to actively managed strategies and more than 7 in 10 respondents have confidence in active management. The study, which was conducted by CoreData Research in August of 2016, includes insights from 845 professional investors around the globe, including 300 retail advisors, 50 institutional investors and 35 professional buyers in the US.

"Clearly, many of the alternatives to actively managed strategies have gained traction in recent years, but professional investors have by no means turned away from active," said Carol Geremia, co-head of Global Distribution and president of MFS Institutional Advisors, Inc. "We continue to see a strong bias toward active management today and the survey shows this trend should continue, especially with many investors worried about increased market volatility in the coming years."

In line with global respondents, more than 8 in 10 US professional investors are at least somewhat concerned about a major drop in equity or bond markets over the next 12 months, and 84% of respondents indicate that protecting capital in down markets is one of the most important attributes when considering an active manager. Moreover, 59% maintain that active management offers superior risk management controls over passive investment options, and half of US respondents surveyed believe actively managed strategies are the best way to mitigate downside risk in a portfolio during a bear market. Evidence supports their conviction. Over the past 25 years, the top quartile of active managers managing global strategies have added 7.6% in excess returns in falling markets.1

Investment time horizons are getting shorter
Although professional investors expect active managers to help protect capital in volatile markets, short-term pressures have led to performance chasing. Sixty-four percent of US respondents surveyed look at performance track records of five years or more when hiring external managers. However, 80% say they will begin a search for a replacement manager after just three years of underperformance.

"Professional investors believe in the premise of long-term investing," said Jim Jessee, co-head of Global Distribution and president of MFS Fund Distributors, Inc. "But with pressure from their clients to show positive returns in the short term, they simply can't tolerate an extended period of underperformance."

According to US respondents, a full market cycle lasts about 6.3 years. And over three-quarters of those surveyed agree that longer investment periods provide a better foundation to distinguish skill from luck. However, when it comes to measuring the success of their investment portfolios, 42% of respondents focus on one- or three-year performance.

Globally, professional investors are increasingly being pressured to generate positive returns in all market environments. Seventy-eight percent of US respondents and 75% of respondents surveyed globally indicate their organization expects them to generate positive returns over either one or three years. And 8 in 10 say they review the investment performance of their external investment managers on either a daily, monthly or quarterly basis.

"Sophisticated investors show significant concerns over events they have very little control over," said Geremia. "Combined with a short-term view toward evaluating manager performance and a tempered confidence in hitting return targets, investors can more easily become traders, focused on the daily gyrations of the market and less on their long term goals."

Lower for longer
With global growth hindered by large amounts of debt in developed markets and lower-for-longer central bank policies, there is a strong consensus that average annual benchmark returns will be lower than their historical averages for the foreseeable future. Just 37% of US respondents surveyed say they're optimistic about the prospects for their home country's economy, and 8 in 10 US respondents are at least somewhat concerned about both negative interest rates and growing government deficits. As such, professional investors have tempered expectations of hitting the historical returns on which they have based their goals. Less than half (48%) of respondents surveyed in the US are highly confident about achieving an expected return of 6.4% annually over the next three years. This will put added emphasis on the ability to generate excess returns.

"Return expectations have clearly fallen in recent years, which could have a significant impact on pensions, endowments and other long-term savers," said Geremia. "Now more than ever, the alpha potential of active management is critical for investors to solve for long-term needs."

Today professional investors must take three times the risk they did 20 years ago to earn the same returns, according to recent research from Callan Associates2. It's not surprising then that 85% of both US and global respondents surveyed say a strong risk management process is one of the most important factors they consider when selecting an active manager.

"After a prolonged and relatively low-volatile period following the global financial crisis, the cyclicality of the markets is likely to reassert itself before too long," said Jessee. "Focusing on a long-term plan, asset allocation and risk management are keys to coping with the inevitable volatility inherent in risk markets."

1Analysis using Morningstar data. Rising and falling markets based on calendar-year returns when the S&P 500 Index rose or fell (1990–-2014). Top quartile and median taken from the Morningstar World Stock category. Excess returns, net of all fees (including 12b-1) but excluding sales charges, calculated against the MSCI World NR USD. Analysis covers all share classes and includes funds that have since been liquidated or merged, but excludes index funds. The falling markets are 1990, 1992, 2000, 2001, 2002, 2008 and 2011. Analysis includes extended performance where available. Extended performance refers to the blending of performance between a new share class and the original portfolio to help investors see how the portfolio as a whole has performed over time.

2Callan Associates, "Risky Business" September 2016, authors Jay Kloepfer and Julia Moriarty, CFA

About MFS Investment Management
Established in 1924, MFS is an active, global asset manager with investment offices in Boston, Hong Kong, London, Mexico City, São Paulo, Singapore, Sydney, Tokyo and Toronto. We employ a uniquely collaborative approach to build better insights for our clients. Our investment approach has three core elements: integrated research, global collaboration and active risk management. As of October 31, 2016, MFS manages $424.5 billion in assets on behalf of individual and institutional investors worldwide.

About CoreData
CoreData Research US is the Boston-based arm of a broader global specialist financial services research and strategy consultancy. With a primary focus on financial services CoreData Research provides clients with both bespoke and syndicated research services through a variety of data collection strategies and methodologies, along with consulting and research database hosting and outsourcing services. The Boston division is part of the CoreData Group and has operations in Australia, the United Kingdom, the United States of America, Mexico, Malta, Singapore, South Africa and the Philippines.

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